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Lenders and mortgage insurers pull back

In recent weeks, mortgages quietly became harder to get.

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Mortgage insurers require higher credit scores and bigger down payments than they did a month or two ago. Underwriting software used by brokers and loan officers is issuing fewer approvals than at the end of May.

Most buyers can still get home loans, but some find themselves pushed out of the private mortgage insurance, or PMI, market. Instead, they have to get mortgage insurance through the Federal Housing Administration. That often entails having to switch mortgage brokers, because many don't have FHA certification.

The upshot: Although mortgages have become harder to get, they're not impossible to get. Borrowers must document income and assets, bring a down payment (or have equity) and have enough flexibility to change lenders to get an FHA-insured mortgage. It helps to have a high credit score.

Bob Moulton, president of Americana Mortgage of Manhasset, N.Y., has a client who wanted a jumbo, interest-only mortgage. Moulton tried to get the client a loan through Astoria Federal Savings, which required a credit score of 740. That's a high hurdle in the mortgage world, and Moulton's client couldn't qualify because he had a credit score of 672.

"And it's a full income check," Moulton laments. He adds that two years ago, borrowers could get loans if they fogged a mirror, and "now they give you a full medical exam."

Michael Moskowitz, president of Equity Now, a mortgage lender based in New York City, recalls a recent phone conversation he had with someone from a big rival bank. "It was like they were in self-preservation mode," Moskowitz says, with loan programs being pulled back and lending guidelines becoming more conservative.

Caution takes over
Lenders were bound to become more cautious, because they were so reckless during the boom years of 2003 through the beginning of 2007. Their carelessness is yielding an ever-rising tide of delinquencies and foreclosures, made worse by falling home values.

In the final months of 2007, it became clear that home values were falling in many markets across the country. Mortgage giants Fannie Mae and Freddie Mac, which set guidelines for standardized mortgages, announced that they would enforce a "declining markets" policy that requires higher down payments for loans where house prices are falling.

Hardball with software
Borrowers and lenders complained that the policy was scuttling deals. In May, Fannie Mae announced that it would rescind the rule June 1. That happened to be the same date Fannie rolled out the newest version of its loan decision-making software, Desktop Underwriter. It wasn't a coincidence. A Fannie spokeswoman explained that the company could ditch the declining-market policy because the new loan software "will limit risk layering and assess each loan more precisely."

And what does that mean? Stephen Swad, Fannie's chief financial officer, told analysts in May that, "We have significantly tightened underwriting and eligibility standards." In a memo, Fannie told lenders to expect the new software to reduce approval rates.

Next: "The new guidelines cast a wary eye on anyone who is ..."
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